Interview of the Vice President by Larry Kudlow, Kudlow & Company
Ceremonial Office
Dwight D. Eisenhower Executive Office Building

10:50 A.M. EDT

Q Mr. Vice President, welcome back to Kudlow & Company, sir.

THE VICE PRESIDENT: It's good to be back, Larry.

Q Let me begin with the latest. The administration really turned the
heat up on Iran, freezing all the banking assets for the Revolutionary
Guard and the Quds. At the same time, as you know, oil prices have
jumped to $92-$93 a barrel. Let me just ask you this: What is the
issue here regarding oil? Would you use the Strategic Petroleum
Reserve, knowing that there may be additional actions in the Middle
East?

THE VICE PRESIDENT: Well, the Strategic Petroleum Reserve there is
primarily, obviously, to deal with an interruption in supply. Lots of
times there have been discussions. In fact, back in the Clinton
administration, it was used to try to manage prices -- that's not what
it's for. And we've recommended expanding the petroleum reserves,
Strategic Petroleum Reserve; we think it's important to do that. But
it's a classic case that we're faced with right now, to the extent that
you do get unrest or potential problems in the Middle East. Our
reliance on foreign sources of energy creates a certain vulnerability.
The best short-term response we have for that is the Strategic Petroleum
Reserve.

Q Would these financial sanctions wind up in some sense preventing
Iran from exporting oil? I think they're still selling about 3 million
barrels a day.

THE VICE PRESIDENT: They are.

Q Would they apply there at some point?

THE VICE PRESIDENT: I don't want to forecast that now. What we did
yesterday, obviously, was focused on the IRGC, the Iranian Revolutionary
Guards Corps, and the Quds Force, which is part of that. And the
emphasis is upon their activities with respect to proliferation, to
ballistic missile technology, as well as the support for terror that
Quds Force provides in many places in the Middle East: Hezbollah,
Hamas, their activities in Iraq, and Afghanistan as well, too.

Clearly the Iranians want to sell oil. They do sell oil into the
international market. That's an important consideration, but from our
perspective it's very important that if you're going to do business with
Iran, you're going to have problems doing business in the United States.

Iran is a threat on many fronts in that part of the world. In Lebanon
they've been actively working through the Syrians to try to topple the
government of Lebanon. They are making significant problems for us in
Iraq and in Afghanistan, where they're providing explosively formed
penetrators and training and so forth to help the Taliban in Afghanistan
and some of the Shia insurgents inside Iraq. Plus, obviously the big
issue is the fact that they are working aggressively to develop the
capacity to enrich uranium, and the end of that process will be the
development of nuclear weapons.

Q Let me just take this oil issue a little further out. Years ago in
late 2000, early 2001, when you were first elected, you said the U.S.
economy was on the front end of a recession. You were way ahead of the
whole economics fraternity; you called that recession. I gave you the
Forecaster of the Year Award, as I recall back in 2001.

THE VICE PRESIDENT: I remember that.

Q Yes, it was quite a distinction. And I want to ask you, is there a
sense, in your mind or the President's mind, at what point the rise in
oil price really pushes us over the edge into a recession? Economists
have failed to predict this. They've said, you know, $50, $60, $70; now
we're approaching $100. Is there a break-even point?

THE VICE PRESIDENT: I couldn't forecast a break-even point on that,
Larry. I think -- a couple a points I'd make. Number one is I think
our economy has been amazingly resilient to what's happened to oil
prices over the last couple of years. Clearly there's been a major
increase in oil prices, and the economy has adapted to it and adjusted
very well. I think part of that is the fact that we're twice as
efficient now as we were 10 or 12 years ago with respect to how we use
energy; that is, we get much more by way of economic output per unit of
energy input than we ever have before. We're just getting better and
better and more efficient all the time. So it hasn't had the impact
that it might have had, say, 20 or 30 years ago, as it did back in the
'70s, for example, when we all remember what happened at that time. So
I am not here today to forecast that we're going to have an oil-driven
recession. I wouldn't say that. I don't see that, but I'm not an
economist. I go to the same people you go to looking for forecasts.

Q Well, you have a better track record than most people, honestly.
That's why I asked.

THE VICE PRESIDENT: Well, I'm one for one and I'll stay with a perfect
record as long as I don't do it again.

Q Yes, one-time in-a-row is a fabulous forecasting record. But let
me ask you more on the economic outlook. The housing recession has
clearly deepened; really not a piece of evidence suggesting otherwise.
The sub-prime credit virus in the banking system has deepened. I would
dare say both the Fed and the Treasury, Mr. Bernanke and Mr. Paulson,
underestimated the virulence of this housing problem. How do you see
it, and inside the White House councils, how much of a recessionary
worry from that is there?

THE VICE PRESIDENT: Well, we look at the same forecast everybody else
does, basically. And I had lunch with Hank Wednesday of this week.
We've got a group that meets every Wednesday inside the White House that
focuses on the economy and economic policy. I think we are -- what
we're seeing is a bit of a slowdown here, but the forecast I see for
next year indicate continued growth. And I think clearly there have
been -- there's been a significant adjustment for us in terms of what's
happened in the housing market. But I think we're far short of a point
where we'd say that a recession is just around the corner. I don't
think it is, but again I rely upon the professional advice that we get
from our economists, as well as what we see in the blue chip.

Q You satisfied with the Federal Reserve's response? So far they cut
rates once by 50 basis points. They meet again this coming Wednesday.
Are you satisfied with the Fed?

THE VICE PRESIDENT: The Fed makes Fed policy, and we generally refrain
from editorial comments on what they're doing. I'm somebody who has a
great respect for Ben Bernanke. I think he's a good Chairman. We all
worked with him closely before he became Chairman of the Federal
Reserve, and I think the Fed's doing a good job.

Q Are you worried that the dollar has fallen too low? I mean, you
can hardly get through a day in the financial news without reading about
the dollar setting a new low. Does that bother you? I mean, when I
worked for President Reagan many years ago, he used to say a great
country needed a strong and reliable currency. Does this dollar story
bother you?

THE VICE PRESIDENT: We think the key -- we do believe in a strong
dollar, but we think the key is that it be allowed to adjust based on
market forces out there, and we think that's in fact what's happening.

Q President Bush is speaking today, this morning, about his
unhappiness with the congressional appropriations process and spending
overruns. He's already vetoed the SCHIP bill. He's kind of become the
budget warrior this year. What can you say about that?

THE VICE PRESIDENT: Well, he's doing it and he's enjoying it. He did
veto the SCHIP bill. The House yesterday passed another one that is
veto bait, as well. Congress hasn't done anything to improve it.

Q Veto bait?

THE VICE PRESIDENT: Is veto bait. And the fact is, the Congress spends
time re-passing legislation that he's already vetoed once. He sustained
the -- that veto; we had the votes to sustain an override -- to avoid an
override and sustain the veto. And their response is to come right back
and do it all over again, wasting more time. They've got something like
19 legislative days left if they're going to meet their target
adjournment date in mid-November. And they have yet to pass us for --
their signature, to get to his desk, a single appropriations bill.

This is -- you've got to go back 20 years to find a time when the
Congress was as inefficient as it is today. They're not doing their
business. They're postponing action on the supplemental for Iraq.
Their general approach, I think, has been remarkable in terms of not
producing any benefits, not moving on the things that we need to be
moving on.

Q In your judgment -- let's go back to that supplemental. It's about
a $50 billion supplemental. The Democrats have, from time to time,
threatened to stop appropriations for the war as part of their anti-war
efforts. Where do you stand on this supplemental? Are the negotiations
in the backdrop, or is this going to be larded with pork? Might it be a
veto bait? Where is this going to come out?

THE VICE PRESIDENT: Well, the reason for the supplemental is to pay
what's necessary in order to be able to sustain the troops in the field,
to be able to continue our operations in the global war on terror and
Afghanistan and Iraq. And it's absolutely essential that it get passed.
And when Congress says, well, gee, we don't have time to deal with it
now, we're going to lay it over and take it up next spring -- it strikes
me that's a classic example of them not stepping up and taking
responsibility for a very important piece of business that they are
responsible for. They've got to appropriate that money.

I think it may partly be tied up with their attitude towards the war,
but the fact of the matter is, we are succeeding in Iraq, we are making
significant progress. We do need that money. It goes to support the
troops in their endeavors. And it's a bit hypocritical on the part of
the Democrats to say they support the troops, but, oh, by the way, we're
not going to pass the money or appropriate the funds that are needed in
order to be able to sustain their activities. This is money for
equipment, for pay, for all of those things that go into maintaining a
first-class fighting force. And the Democrats are trying to duck it.

Q Some of the political pundits are saying, well, okay, President
Bush has become "budget warrior" with his veto pen; he's also become
very, very aggressive on preserving the low tax rates. He calls himself
a supply-sider. I've not heard him use that term before; I was glad to
hear it. But I was interested, all of a sudden it surfaced this year.
Is Mr. Bush and are you trying to sharpen the Republican message for
2008? You're trying to say, here's our contrast: Veto excessive
spending, keep tax rates low? Is this in large measure a political
strategy?

THE VICE PRESIDENT: No, I think it's a -- I think it is a strategy
driven by policy, and our policy concerns. I think that's good
politics. But I think if you look at it -- in effect, what happened, of
course, was for the first six years we were here, we had the Republican
Congress. We negotiated on the top line on budgets every year. The
Congress met our top lines, sometimes in the face of a veto threat. And
so there was no opportunity or necessity to have vetoes as an important
part of your strategy.

Q Do you think that was a mistake, looking back on it?

THE VICE PRESIDENT: No, I don't. You had to negotiate with the
Congress. Denny Hastert was not going to sign us a bill the President
would veto. So we sat down and we'd negotiate on a top line, and they,
in effect, came into agreement in virtually every case. Now we're in a
situation where they're trying to pass a budget, for example, for this
year, that's $22 billion over our top line. We've made it clear we will
veto it. They sent us the SCHIP bill, we vetoed it. They send us
another SCHIP bill, we'll veto it. It's not just politics, we think
it's good policy.

The other thing we've got, of course, on tax policy, is there is a
fundamental difference between the parties in terms of how we look at
the world with respect to tax policy. We had -- you had Charlie Rangel
on your show last night. Charlie is a good guy; I like him; served with
him for 10 years in the House; respect him as Chairman of the Ways and
Means Committee.

Q You and he have had some words in the past, as I recall.

THE VICE PRESIDENT: Well, we have, but it was good-natured.

Q What did you think of his mother-of-all-tax-reform plan?

THE VICE PRESIDENT: Well, I don't like it. I think it's bad in several
respects. It raises the rate on capital gains. It raises the rate on
dividends. It raises the top rate on the income tax. Those are
terrible ideas. Those are all rates we reduced when we came in, in 2001
and 2003. They've been absolutely crucial to driving this economy and
to creating the incentives out there for businesses to invest and to
create more jobs and more wealth. They're the prime reason we've seen
an increase in tax revenues. And also the fact that we've got a deficit
next year that's 1.2 percent of GDP, which is half what the deficit has
been over the last 40 years. That's good tax policy, and Charlie wants
to change it.

Q How about his proposal to lower the corporate tax rate? You got to
give him some credit, I think. I mean, he comes with this -- I think in
a good sense he's trying to help our companies --

THE VICE PRESIDENT: Well, I think he may be. We'll see. Maybe that's
trying to suck a few people in. But when I see him raising the top rate
on individuals, and recognize that about three-quarters of the people
who pay the top rate are small businesses -- and small businesses more
than corporations drive job creation in this economy -- it's a
fundamentally bad idea to go back and reverse course on that top rate on
dividends and on cap gains. And I'll give Charlie credit, he wants to
reduce the corporate rate, okay, but he's doing an awful lot of damage
in the name of what he describes as tax reform. I think it's a bad
proposal.

Q You were talking before about the success of the tax cuts, and so
forth. On the campaign trail, many Democrats -- Senator Clinton, in
particular -- have said two things. Number one, middle class does not
participate in this economic boom. She calls it a "middle class trap
door," and says that wage inequality is the worst it's been since 1929.
Do you have a response to those charges?

THE VICE PRESIDENT: Yes, I don't agree with it. I think that analysis
is wrong. I think we've added well over 8 million jobs since the
recovery took off some four years ago. We have seen a significant
economic expansion underway now for 40-some months. It's been, I think,
a very successful economic policy. And the suggestion that somehow it's
hard times out there, I just -- I think is a misstatement. Clearly,
there are pockets where people run into difficulties, where we have
economic slowdown for one reason or another -- Michigan is still having
troubles because of the auto industry and so forth -- but I think
overall, in terms of macroeconomic policy and what's worked for the
economy for the last several years now, it's what the President put in
place, not what Senator Clinton suggested.

Q But there is a middle class anxiety, and it is going to be an issue
in the upcoming presidential election. Do you think the White House and
the Republican Party in general has had a sufficient response to that
anxiety? Some of it's about trade, some of it's about globalization,
some of it's about transforming our economy -- what the eminent
economist Schumpeter called "gales of creative destruction." I mean,
people are a little worried out there. Do you agree with that? Do you
think there's been a sufficient response to it?

THE VICE PRESIDENT: I think we need to do an aggressive job, as a party
-- the administration and our friends in Congress -- at emphasizing what
we have done that has worked so well, with respect to tax policy and
economic growth and so forth, and what will happen if the Democrats take
over.

It's not a mystery. You can look at what Senator Clinton believes in
and how she voted. You can look at Charlie Rangel's proposals with
respect to tax policy. And the Democrats basically want to spend more
money, they want to raise taxes. It's basically an anti-growth policy.
It's exactly the opposite of what the Republicans have been providing
for the last several years. That's a fundamental difference. They're
entitled to their beliefs.

What we have to do -- as you say, I think we need to work very hard to
make our case so that the American people understand both the benefits
of what's occurred, what we've done out there, as well as the problems,
the price that will be paid if the Democrats take over.

Q Speaking of another Democratic frontrunner, you and Senator Obama
are apparently related. This information comes from your wife, Lynne,
who appeared on our program not too long ago. Mareen and Susan Duvall,
immigrants from France -- have you spoke to Mr. Obama about this shared
experience?

THE VICE PRESIDENT: Cousin Barack? (Laughter.) No, we haven't --
haven't had the opportunity to talk about it.

Q You haven't once called him up, and say, well, heck, the family
tree --

THE VICE PRESIDENT: No. Well, I didn't know whether that would help
him or hurt him, so I thought I'd probably stay away from him, so.
(Laughter.) But apparently we do have a common ancestor, about eight or
nine generations back.